Ruling on obligations of bankrupt companies coming

In the spring, the Supreme Court of Canada heard arguments in Orphan Well Association, et al. v. Grant Thornton Limited, et al., regarding the obligations that trustees or receivers of bankrupt companies have when it comes to cleaning up contaminated sites they have acquired.

Nader Hasan says when orphan wells aren’t cleaned up, those costs will eventually be passed on to Canadian taxpayers.

In the spring, the Supreme Court of Canada heard arguments in Orphan Well Association, et al. v. Grant Thornton Limited, et al., regarding the obligations that trustees or receivers of bankrupt companies have when it comes to cleaning up contaminated sites they have acquired.

Ontario lawyers say they are paying attention to the decision, which could have an impact on regulatory oversight for businesses across Canada. The coming ruling could also have major implications on the oil and gas industry, they say.

In the case, Redwater Energy Corporation became insolvent, and its trustee in bankruptcy wanted to renounce or disclaim Redwater’s interest in its “orphan” wells but keep and sell the valuable wells to maximize the recovery of the secured creditor.

The Alberta Energy Regulator said this was not permissible and a sufficient portion of the sale proceeds from the valuable wells must be set aside to meet the costs of remediating those orphan wells.

Nader Hasan, a partner with Stockwoods LLP in Toronto, who represented intervener Greenpeace at the SCC, says that if Thornton’s position that bankruptcy law is paramount is correct, then environmental obligations will take a back seat to bankruptcy law and the rights of creditors.

“From an environmental perspective, when it comes to the oil and gas industry, the environment is an involuntary creditor,” says Hasan.

“It bears all of the risk but enjoys none of the benefits. Unlike debtors, who eventually emerge from bankruptcy, the environment never gets a fresh start.”

Greenpeace’s argument was that co-operative federalism is necessary for meaningful environmental regulation.

Most Read

Keely Cameron, counsel for the Orphan Well Association and the Alberta Energy Regulator in Calgary, says the case is expected to have wide-reaching implications for regulators, lenders, energy companies and potentially other industrial activities throughout Canada. There were 14 intervenors in the case.

The association and the regulator have taken the stance that they should not have to wait until the end of an insolvency before regulating end-of-life obligations for a well.

“The case raises questions regarding who should bear the cleanup costs associated with energy development when a company becomes insolvent — lenders, regulators, provinces, other industry members or the public — and what is a regulatory obligation as opposed to a provable claim?” says Cameron.

Cameron says that three constitutional law principles were raised at the Supreme Court of Canada hearing — federal paramountcy, co-operative federalism and inter-jurisdictional immunity, the latter argued by the intervenor provinces.

“The Supreme Court of Canada’s decision may provide clarity as to what was intended by s. 92(A) of the Constitution Act, 1867, which provides provinces with exclusive jurisdiction to make laws in relation to the exploration, development, conservation and management of non-renewable natural resources,” says Cameron.

Tom Cumming, partner with Gowling WLG in Calgary, who represents trustee Thornton, says the current system allows assets of an insolvent producer to be sold so that creditors and stakeholders can recover funds, but if the AER and Orphan Wells Association are found to be right, they would be in control and creditors could potentially recover nothing.

“The ability to deal with insolvent producers is very important,” says Cumming, adding that it will impact on an oil and gas company to obtain financing. “The difficulty with the approach the AER has taken is there was no certainty, and that is the very thinking that underlay the amendments to the Bankruptcy and Insolvency Act that led to s. 14.06.”

Cumming says the now 88,000 unabandoned inactive wells and 188,000 unreclaimed inactive wells won’t go away, no matter which way the SCC rules, because Alberta doesn’t have a regulatory structure where producers have to carry out abandonment and reclamation activities — only that they are liable for them. There was also no requirement that, if a permit was transferred, the balance sheet and liabilities of the new company were considered, meaning they weren’t tested if they could meet their obligations.

Cumming says the tendency for large producers to transfer properties to smaller companies with a single producing well with several non-producing ones had shed their liabilities to those smaller companies — something other sectors could not get away with under environmental laws.

Cumming says that if a receiver can’t sell assets to a regulatory-compliant purchaser, then there is no purpose to an insolvency and the assets might as well be left with everyone walking away, which is an important problem.

Cumming says the distinction between monetary and regulator obligations should be an important one, but it remains an evolving area in the courts.

“What hasn’t been grappled with is the idea of what kind of obligation ought to be unquestionably respected by either a debtor in an insolvency proceeding or a receiver,” says Cumming.

However, Hasan says that, while Thornton tries to frame the issue from the perspective of fairness, it leaves out the reality that the provincial legislation is all that is there to protect the environment.

Hasan adds that the Constitution doesn’t delegate the exclusive jurisdiction over the environment to either the provinces or the federal government, but it has overlapping powers, which requires co-operation in order to have effective environmental regulation.

“For that to happen, you need a vibrant conception of co‑operative federalism,” says Hasan. “If the respondents are right, we would essentially be rolling back this doctrine of co-operative federalism, and it would involve the Supreme Court taking a much more restrained approach to co-operative approach than we’ve seen at any time in the past 20 years.”

Hasan also notes that, when orphan wells aren’t cleaned up, those costs will eventually be passed on to taxpayers.

“This is an end run around the polluter pays principle,” Hasan says.

Tamara Farber, a partner at Miller Thomson LLP in Toronto, says the provinces generally regulate in the environmental sphere in similar ways.

“When federal bankruptcy laws are overlain, we start to see strategic corporate decisions being made at the possible expense of the provincial taxpayer,” says Farber, who wasn’t involved in the case.

“The issue isn’t just an Alberta issue. To me, it’s about the proper interplay between federal bankruptcy laws and provincial environmental laws in every province.”

Farber says this case takes the Supreme Court’s Abitibi test to the next level of analysis. The test arose from Newfoundland and Labrador v. AbitibiBowater Inc., 2012 SCC 67, which established three requirements that regulatory orders must meet in order to be considered claims that could be subject to the insolvency process.

“Does Abitibi apply in all cases or is there some recognition of different types of regulatory oversight?” asks Farber. “Do all actions of a regulator qualify it as an ultimate creditor? If the Supreme Court of Canada meant something in Abitibi when it said that not all regulatory orders qualify a regulator as a creditor, is this such a case?”

Carole Hunter, a partner with DLA Piper (Canada) LLP in Calgary, who was not involved in the case, says s. 14.06 of the Bankruptcy and Insolvency Act, at the centre of this case, hasn’t received much attention until now. The section states that a trustee or receiver is not personally liable for any environmental condition that arose before their appointment and that, if there is an order that would require a trustee to remedy environmental damage, they have a certain period of time to renounce their interest in the property.

“It was really a grappling of this as an issue of health and safety or is it really this black letter law of this company is insolvent and this is what they’re entitled to do and too bad for everybody else?” says Hunter.

Free newsletter

Our newsletter is FREE and keeps you up to date on all the developments in the Ontario legal community.
Please enter your email address below to subscribe.